Tuesday, December 15, 2015

End of an Era?

Supply chain guru calls for ending parcel delivery
guarantees.

On-time
delivery guarantees have existed for more than 30 years for express and 17
years for ground service, but the time has come for parcel carriers to put an
end to them, said supply chain consultant Satish Jindal, writing in the Journal
of Commerce. Those on the front lines at shippers and even carriers would
welcome such a move, he said.

In 1982, Federal Express was charging $12.50 to transport an overnight letter
just blocks from where it was picked up (compared with 20 cents for first-class
postage) and generating huge margins to support such a guarantee. The guarantee
also was a great marketing move to gain shipper confidence for FedEx’s superior
on-time performance, achieved by a dedicated hub-and-spoke air network compared
to UPS’s dependence on passenger airlines.

For shippers, the guarantee was such a compelling value proposition that UPS
and Airborne Express also had to offer it. But the carriers knew shippers had
limited opportunity to seek refunds for service failure, because there was
practically no visibility into deliveries that didn’t arrive on time. As a
result, carriers experienced minimal cost for refunds.

Then the internet took over the world, making the status of a parcel delivery
readily available via carrier websites. On-time service was about 95 percent
for UPS and FedEx Ground. With ground service volume many times larger, it
quickly became more appealing for shippers to seek refunds for service
failures.

Facing the cost of providing refunds, carriers have improved on-time
performance for ground service, which is now about 99 percent. Another
not-so-friendly approach the carriers have taken to reduce cost of service
failures includes denial of refunds using hundreds of exceptions. The number of
codes for excluding parcels from service failure refunds has tripled to 450 in
2015 from 150 in 2000.

With the simplified refund-filing process, and with costs of processing those
requests increasing, the parcel carriers started to seek waivers in contracts
from the guaranteed provision of the service. This approach appealed to
shippers, many of whom have waived the guarantee in exchange for slightly lower
rates. As such, more than 70 percent of parcel volume now is exempt from the
service failure refund.

Shippers’ lack of need for guarantee is further evidenced by their willingness
to switch from the carriers’ guaranteed ground service to non-guaranteed hybrid
services such as FedEx SmartPost and UPS SurePost. This realization isn’t lost
on the world’s largest parcel shippers. Amazon ships about 4 million parcels a
day using multiple carriers, yet almost all of its deliveries are made without
having a guaranteed delivery commitment.

The time has come for the parcel industry to eliminate its money-back guarantee
for express, deferred and ground service, said Jindal, or just offer
shipper-friendly automatic refunds for failures.

About TOTALogistix

TOTALogistix is a privately held corporation headquartered in Sparta, NJ. We helped define the Third Party Logistics Industry in 1991. Today we provide a wide spectrum of transportation and related supply chain management services to manufacturers, retailers and distributors throughout North America.
In our 20+ years in business, we’ve saved money for nine out of ten companies whose transportation we’ve analyzed. We’re confident we can do the same for you. Improving logistics performance starts here.